Fiscal year 2024-25 has just commenced and most employees would now be required to submit their tax declarations on employer payroll portals that will determine which regime would be applied for tax withholding and how much tax would be withheld from their salary on a monthly basis. While this is an annual exercise, if done with diligence, it can go a long way in optimizing on individual tax outgo. Some of the ways by which employees can reduce their tax burden:
a. Choose the right tax regime: From 2023, the ‘simplified tax regime’ has been made the ‘default option’ for all employees unless the employee specifically selects the ‘regular tax regime’. The simplified tax regime provides a tax advantage to employees but ignores permitted deductions and exemptions such as House Rent Allowance (HRA), leave travel allowance (LTA) Chapter VI-A etc. Hence employees must carefully evaluate based on personal facts and future plans as to which regime is most advantageous to them.
b. Deduction under Chapter VI-A: Chapter VI-A offers the employee various avenues to reduce taxes provided an approved expenditure or investment is made by the employee. The section 80C offers a deduction up to INR 1.5 lakh if the employee deposits money in PPF or pays a life insurance premium or invests in tax saving fixed deposits etc. However, while investing one must consider the contribution to provident fund that is already done by the employee as it is also eligible for deduction under 80C. For the balance amount the employee needs to consider the value of the investment rather than just the tax break. For example PPF provides a good rate of return but there is a lock-in period of 15 years. Life insurance is a good avenue for insuring one’s life, but the payment is recurring and the proceeds may be taxable if the aggregate premium exceeds INR 5 lakhs annually.
Taking a medical insurance will give the employee a break under section 80D along with the health coverage. Similarly, a deduction for interest on loan for education from a financial institution for self or kids is available if the employee is incurring such costs. Deduction under Chapter VI-A is not permitted under the ‘simplified tax regime’ barring the exception of employer contribution to NPS.
c. Deduction from salary income: Under the regular tax regime employees could consider the exemption for HRA and LTA if they incur expenditure for that purpose. Provision of car, reimbursement of chauffeur salary, telephone and internet expenses are some other examples. Employees must remember to accurately collect and submit all required documentary proof to the employer in time to ensure that these deductions are considered by the employers for tax withholding and are a part of Form 16. This is critical as deductions claimed directly in the tax return are scrutinized minutely by tax authorities.
While the finance minister in the past few years has encouraged taxpayers to adopt the simplified tax regime, there are still isome deductions and exemptions available in the Income-tax Act that will reduce the tax burden for the taxpayer. One must use these wisely and make the most of the available provisions.
The writer is Partner, Deloitte India. Views expressed do not represent the views of Business Today